TMI Blog2022 (2) TMI 383X X X X Extracts X X X X X X X X Extracts X X X X ..... of Rules 11UA defines the word Balance Sheet. This clause again referred to the Balance Sheet as drawn on the valuation date and where such Balance Sheet is not drawn on the valuation date it will be of the date immediately preceding the valuation date. Therefore, if the share was allotted in financial year 2014-15, and the Balance Sheet were not drawn on the date of the allotment, the relevant Balance sheet on the basis of which the fair market value could have been determined would be the Balance sheet as on 31.03.2014. As per ld PCIT, there would be no relevance of the Balance Sheet drawn on 31.03.2013. We do not agree with ld PCIT that fair market value of the shares should be determined based on Balance sheet as on 31.03.2014. The assessee made long term projections based on Balance Sheet drawn on 31.03.2013, and loan was sanctioned by the bank based on said projection. As per said projection, the shares were partly issued in previous year and partly in current assessment year. Moreover, the assessee had submitted before assessing officer, fair market value of shares based on the Balance sheet as on 31.03.2014, and there was no significant difference noticed by the asses ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al Commissioner of Income Tax ( ld PCIT in short), under section 263 of the Income Tax Act 1961( for short the Act ). Grievances raised by the assessee, are as follows: 1.The Ld. PCIT, has erred and was not just and proper on the facts of the case and in law in considering the assessment order passed u/s 143(3) as erroneous and prejudicial to the interest of the revenue and accordingly passing order u/s 263 of the Act to set aside the Assessment Order. 3.The relevant material facts, as culled out from the material on record, are as follows. The assessee before us is a company engaged in the business of Trading of Art Silk Cloth. The assessee company had filed its return of income for assessment year 2015-16 on 30.09.2015 declaring total loss to the tune of ₹ 4,79,20,437/-. The assessment order, under section 143(3) of the Income Tax Act, was framed by the Assessing Officer on 06.12.2017 by accepting loss declared in the return of income. 4.Later on, ld. PCIT has exercised his jurisdiction under section 263 of the Income Tax Act 1961. The ld PCIT observed that assessee company had allotted 9,96,000 equity shares at face value of ₹ 10 per share ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ly inflated the financial parameters, in order to get higher valuation. The Assessee has painted a rosy picture to inflate the fair market value of its shares. This can be seen while comparing actual vs. projected figures of profit after tax and free cash flow from operation. If the projected figures were factually sound, it would converge with actual figures. However, it can be seen that projected figures are consistently and substantially higher than actual ones. Thus, it is clear that there was no factual basis for determination of projected figures and the same were highly inflated. Therefore, not only assessee has relied upon older share valuation certificate but even otherwise the valuation certificate does not reflect fair market value (FMV) of the shares. 6. The ld PCIT observed that assessee-company had issued shares at a premium of ₹ 40 per share and face value of ₹ 10 per share, thus at a total consideration of ₹ 50 per share. As per latest audited balance sheet for the year under consideration, i.e. Balance Sheet as on 31.03.2014, the book value of shares comes to about ₹ 22 per share. Considering this as fair market value (FMV) of s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ained with proper sources. The assessee also submitted list of the Shareholders before ld PCIT. It was contended before ld PCIT that projections were based on the installed capacity of the plant and the percentage output expected achievement year after year. The projections had been made on proper appraisal of the capacity of the plant and the selling prospects of the production. The Banker (State Bank), while sanctioning the loan had obtained Techno-Economic Valuation, a copy of the same was also submitted before ld PCIT. The DCF report is prepared by a qualified C.A as per the guidelines of ICAI. It was further contended before the ld PCIT that whatever documents and evidences asked by the assessing officer by issuing notice under section 142(1) of the Act, during assessment proceedings, were furnished before the assessing officer, therefore, order passed by the assessing officer should not be erroneous and prejudicial to the interest of revenue. 8. However, ld PCIT rejected the contention of the assessee and observed that assessee company had allotted 9,96,000 shares at face value of ₹ 10 per share and at a premium of ₹ 40 per share to various parties. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d by the Tribunal. (vide order of Tribunal in ITA No.221/SRT/2019, dated 13.12.2019, in assessee`s own case).A copy of the said order under section 263 of the Act, in assessee`s case, was placed before the Bench and it was contended by ld Counsel that issue raised by ld PCIT in his revision order under section 263 of the Act for assessment year 2015-16 is covered by the aforesaid order of Tribunal for assessment year 2014-15, therefore, the jurisdiction exercised by ld PCIT under section 263 of the Act for assessment year 2015-16, may be quashed. 11. Shri Kabra, further argues that shares were issued to the same shareholders to whom the shares were issued during the previous assessment year 2014-15, therefore he contended that no fresh shareholders were introduced in the current assessment year 2015-16 and hence there were same set of shareholders, therefore Assessing Officer took the possible view that shareholders were same and shares capital / premium are to be introduced, as per the past projection, therefore there is no any mistake so far the fair market value (FMV) of shares are concerned. Considering these facts, the Assessing Officer did not examine the issue. However, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ial to the interest of Revenue and hence the ld. PCIT has correctly exercised his jurisdiction under section 263 of the Act. Therefore, Ld. DR contended that order passed by the ld. PCIT under section 263 of the Act should be upheld. 13.We have heard the rival contentions, perused the relevant findings given in the impugned orders as well as material referred to before us at the time of hearing. In various grounds of appeal, the sole issue raised by the ld PCIT is that Fair Market Value of shares (FMV) has to be determined on the valuation date which will be either the date on which the money is received or the date of allotment i.e. the date on which the premium is actually taken by the company, the assessing officer failed to examine this point therefore order passed by the assessing officer under section 143(3) of the Income Tax Act, dated 06.12.2017, is erroneous and prejudicial to the interest of Revenue. Though facts have been discussed in detail in the foregoing paragraphs, however in the succinct manner, the relevant facts and background are reiterated in order to appreciate the controversy and the issue for adjudication. During the year under consideration, assess ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted the financial parameters in order to get higher valuation. This can be seen while comparing actual vs. projected figures of profit after tax and free cash flow from operation. If the projected figures were factually sound, it would converge with actual figures. However, it can be seen that projected figures are consistently and substantially higher than actual ones. Thus, it is clear that there was no factual basis for determination of projected figures and the same were highly inflated. Therefore, not only assessee has relied upon older share valuation certificate but even otherwise the valuation certificate does not reflect FMV of the shares. Assessee had issued shares at a premium of ₹ 40 per share and face value of ₹ 10 per share thus at a total consideration of ₹ 50 per share. As per latest audited balance sheet for the year under consideration, i.e. balance sheet as on 31.03.2014, the book value of shares comes to about ₹ 22 per share. Considering this as FMV of shares, the amount of ₹ 28 (₹ 50 minus ₹ 22) per share requires to be taxed u/s 56(2)(viib) of the Act. Therefore, ld PCIT held that above irregu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch expenses were being allowed in earlier year. Hence, this was not a case where there was no enquiry. Action under section 263 cannot be taken on account of inadequate enquiry. Hence, the Commissioner was not justified in setting aside the order under section 263. In the case of Kamal Kumar Gupta Vs. CIT [2012] 23 taxmann.com 280 (Jaipur Trib.) it was held: that the assessee asked by the Assessing Officer to file the details of trade creditors which were shown in the names of agriculturists. The assessee was also asked to give the complete names and addresses of these persons. Accordingly, the assessee had enclosed the list of sundry creditors agriculturists. After receipt of those details, the Assessing Officer had not made any further enquiry. Thus, the Assessing officer made the enquiry and it was not a case of lack of enquiry but could be a case of insufficient enquiry. On facts, the Commissioner was not justified in passing the order under section 263. 11. The cumulative reading of all the above judgments reflects that while making assessment, if the AO had made inadequate enquiry, that would not by itself give occasion to the Commissioner amount to categ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Assessing Officer, during the assessment stage, by way of issue of notice under section 142(1) of the Act, dated 10.07.2017, is placed at Paper book page nos. 4 to 5, wherein the Assessing Officer has raised the query (vide point no.2 of the said notice), in respect of share capital and /premium, which is reproduced below: 2. Large share premium received during the year (verify applicability of Sec 56(2)(viib). (i) A chart showing the names, present addresses and PAN of the investors, opening balance, receipts during the year, and refunds during the year and closing balance of share premium receipts. S. No. Name Address PAN Opening Balance Receipts during the year Refund Closing Balance Copies of relevant ledger accounts of the investors who have paid share premium to the company during the year as appearing in the books of the company duly confirmed by the investors. (ii) Copies of relevant pages of bank statements of the said investors highlighting the payment of share premium by them to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilities, by SBI Bank, dated 25.05.2013 is attached at paper book page nos. 115 to 125. Copy of Techno Economic Viability study Report submitted to SBI Bank is placed at page nos. 127 to 224 of assessee`s paper book. The ld Counsel submitted a chart showing allotment of shares, for financial year 2013-14 and 2014-15, which is placed at paper book page no. 126, and the same is reproduced below: 20. From the above facts it is vivid that shares were issued to the old shareholders as part of project report and valuation of shares has been done by the assessee-company on the date of making the projection. There were no fresh shareholders, that is, shares were allotted to the old shareholders only. The main issue raised by ld PCIT in his revision order is the valuation date of shares. The ld PCIT observed that valuation certificate of shares issued by Chartered Accountant should be based on the Balance Sheet as on 31.03.2014, however, assessee`s valuation is based on audited balance sheet as on 31.03.2013, therefore, ld PCIT held that order passed by the assessing officer is erroneous and prejudicial to the interest of Revenue. At this juncture, ld Counsel submits before us ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d PCIT also raised the issue that projections made by the assessee is not valid. In this respect, ld Counsel submits that projections are based on the installed capacity of the plant and the percentage output expected achievement year after year. The projections had been made on proper appraisal of the capacity of the plant and the selling prospects of the production. The Bankers (STATE BANK), while sanctioning the LOAN had obtained Techno-Economic Valuation, and a copy of the said valuation was submitted before the assessing officer. The data in the report are the basis for the DCF valuation report dated 30/06/2014. The DCF report is prepared by a qualified Chartered Accountant as per the guidelines of ICAI. We note that while following DCF method, assessee had considered plant capacity, industry and market conditions, sanctioning of loan by bank and that valuation reports were prepared as per guidelines given by Institute of Chartered Accountants of India and Assessing Officer had not found any fault in said report and after examining the said report, the assessing officer accepted the valuation made by Chartered Accountant, hence the view taken by the assessing officer is poss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shown in the valuation report and those shown the in the Balance Sheet of F.Y.2014-15 and F.Y.2015-16. However such an objection cannot be given weightage for the reason that firstly no explanation was called for by the ld. CIT (A) on this aspect but he assumed on his own and there apart the assessee has already stated that due to the non-availability of the power connection, it could not commence the production in the initial years therefore, there was no production, which fact is admitted by the AO also and hence, comparison of the projected sales figure with the actuals was not justified. As already stated that the figures given by the C.A. were mere projection/estimations depending upon various factors which nobody could have anticipated or foreseen on the day when such valuation were made. Therefore, there was no justification yet to make a comparison of the estimations with the actuals. Such a comparison is otherwise principally against the contemplation of Rule 11 UA(2)(b) which required the C.A. to prepare a report on DCF Method only i.e. based on mere projections and not actuals as against the NAV Method prescribed u/r 11UA(2)(a). For these reason we find no justifications ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the previous year. the assessee company has issued 11,500 shares of face value of ₹ 100 at a premium of ₹ 900 per share to M/s. Terry Towel Industries Ltd and has thus received total consideration of ₹ 1,03,50,000. The limited issue under consideration is whether the consideration so received for such shares exceeds the fair market value of the shares. Where the answer to the same is in affirmative, the excess so determined over the fair market will be brought to tax as income from other sources as per the provisions of section 56(2)(viib) of the act which reads as under: ''Where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the segregate consideration received for such shares exceeds the fair market value of the shares.'' 15. The explanation to section 56(2)(viib) provides that the fair market value of such shares means the value determined in accordance with the method as may be prescribed. The method of valuation has been prescribed in rule 11UA which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and where he is not satisfied with the same, he can challenge the same and suggest necessary modification/alterations provided the same are based on sound reasoning and rational basis. In the instant case, we find that certain basis objections have been raised by the Assessing Officer in terms of applying the estimated turnover numbers instead of actual numbers and discounting factor, etc which, in our view, has been satisfactorily explained by the assessee company during the appellate proceedings and nothing has been brought on record which can substantially challenge the methodology or the underlying assumption while determining the value of the shares. Further, the fact that the said valuation and the projected financials have been found acceptable by the Bank while sanctioning the term loan and working capital limits, it cannot be said that the same are purely hypothetical and not based on sound financial understanding and market dynamics of the industry in which the assessee operates. 18. ** ** ** 19. In light of above discussions and in the entirety of facts and circumstances of the case, the order of the Id CIT (A) is confirmed and the ground taken by the Reve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd rejecting the declared valuation of the shares and in the impugned addition made by the AO but partly sustained by the CIT (A), which is hereby deleted. 22. We note that Bankers have also allowed Term loan and other Loan facilities based on the very same projections which were made by assessee based on the balance sheet as on 31.03. 2013. The Bankers have judged the veracity of the projections independently and sanctioned the Loan. The Sanctioned Letter and Techno-Economic Viability Report were submitted before the assessing officer. The projections when made are definitely estimates based on future prospects of the industry, on the date of the projections. It is but natural that Actuals may or may not differ from the projections. At a later date comparing the Actuals with the projections made and rejecting the projections stating that the same are invalid and does not match to the actuals, is not prudent and wise. If this would be the case, none of the project would fail. On the similar facts the Coordinate Bench of ITAT Delhi in the case of Cinestaan Entertainment Pvt Ltd vs. Income Tax Officer (177 ITD 809) held as follows: 25. The assessee before issuing the sh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the test of proving the nature and source of the credit received stood accepted. 27. Now what we are required to examine whether under these facts and circumstances Assessing Officer after invoking the deeming provision of Section 56(2)(vii) could have determined the fair market value of the premium on shares issued at Nil after rejecting the valuation report given by the Chartered Accountant on one of the prescribed methods under the rules adopted by the Valuer. Before us, learned counsel, Mr. Dinodia, first of all had harped upon the spirit and intention of the Legislature in introducing such a deeming provision and submitted that such a provision cannot be invoked on a normal business transaction of issuance of shares unless it has been demonstrated by the Revenue authorities that the entire motive for such issuance of shares on higher premium was for the tax abuse with the objective of tax evasion by laundering its own unaccounted money. His main contention was that, being a deeming fiction, it has to be strictly interpreted and there is no mandate to the Assessing Officer to arbitrarily reject the valuation done by the assessee on his own surmises and whims. We are in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ** ** ** (viib) where a company, not being a company in which the public are substantially interested, receives, in any previous year, from any person being a resident, any consideration for issue of shares that exceeds the face value of such shares, the aggregate consideration received for such shares as exceeds the fair market value of the shares: Provided that this clause shall not apply where the consideration for issue of shares is received- (i) by a venture capital undertaking from a venture capital company or a venture capital fund; or (ii) by a company from a class or classes of persons as may be notified by the Central Government in this behalf Explanation-For the purposes of this clause, - (a) the fair market value of the shares shall be the value - (i) as may be determined in accordance with such method as may be prescribed: or (ii) as may be substantiated by the company to the satisfaction of the Assessing Officer, based on the value, on the date of issue of shares, of its assets, including intangible assets being goodwill, know-how, patents, copyrights, trademarks, licences, franchises or any other business or co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of successful directors like Rakesh Om Prakash Mehra who has given block buster films like Bhaag Milkha Bhaag which made a box office collection of INR 164 Crores, and Rang De Basanti which made a box office collection of INR 97 Crores etc. In support Ld. Counsel had referred to Annexure-III, giving details of Track records v. Projections for movies signed with Rakesh Mehra. Engagement of veteran writers and music directors-Like Gulzar and Shankar Ehsaan Roy. Interesting start cast, including the launch of Anil Kapoor's son- Harshvardhan Kapoor and Shabana Azmi's niece Saiyami Kher; along with veteran actors like Om Puri, Anu Malik etc. Keeping in view of engagement of renowned star cast and previous success of directors, the appellant has projected revenue for only ₹ 55 Crores for 1 Big Film in first year which went till ₹ 93.10 Crores in 5th Year. While for other movies, the projections ranged between 22 lacs to 50 Crores. Further the projected revenues were discounted in later years to account for fluctuations in economic cycles. The number of movies and total revenue and average revenue for such movies are as projected under: ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of these averments and the and the manner in which the valuation of the shares has been adopted in the valuation report has been disputed by the Assessing Officer or by the ld. CIT(A) or any material facts have been brought on record to show that either the methodology or the contents of the report are not correct. 31. What is seen here is that, both the authorities have questioned the assessee's commercial wisdom for making the investment of funds raised in 0% compulsorily convertible debentures of group companies. They are trying to suggest that assessee should have made investment in some instrument which could have yielded return/ profit in the revenue projection made at the time of issuance of shares, without understanding that strategic investments and risks are undertaken for appreciation of capital and larger returns and not simply dividend and interest. Any businessman or entrepreneur, visualise the business based on certain future projection and undertakes all kind of risks. It is the risk factor alone which gives a higher return to a businessman and the income tax department or revenue official cannot guide a businessman in which manner risk has to be undert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s conditions, expected demand and supply, cost of capital and host of other factors. These factors are considered based on some reasonable approach and they cannot be evaluated purely based on arithmetical precision as value is always worked out based on approximation and catena of underline facts and assumptions. Nevertheless, at the time when valuation is made, it is based on reflections of the potential value of business at that particular time and also keeping in mind underline factors that may change over the period of time and thus, the value which is relevant today may not be relevant after certain period of time. Precisely, these factors have been judicially appreciated in various judgments some of which have been relied upon by the ld. Counsel, for instance: - (i) Securities Exchange Board of India (supra) - (Bombay HC)] 48.6 Thirdly, it is a well settled position of law with regard to the valuation. that valuation is not an exact science and can never be done with arithmetic precision. The attempt on the part of SEBI to challenge the valuation which is bu its very nature based on projections by applying what is essentially a hindsight view that the perf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d if they have seen certain potential and accepted this valuation, then how AO or Ld. CIT(A) can question their wisdom. It is only when they have seen future potentials that they have invested around ₹ 91 crore in the current year and also huge sums in the subsequent years as informed by the ld. counsel. The investors like these persons will not make any investment merely to give dole or carry out any charity to a start-up company, albeit their decision is guided by business and commercial prudence to evaluate a start-up company like assessee, what they can achieve in future. It has been informed that these investors are now the major shareholder of the assessee company and they cannot become such a huge equity stock holder if they do not foresee any future in the assessee company. In a way Revenue is trying to question even the commercial prudence of such big investors like. According to the Assessing Officer either these investors should not have made investments because the fair market value of the share is Nil or assessee should have further invested in securities earning interest or dividend. Thus, under these facts and circumstances of the case, we do not approve the ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmitted before assessing officer, fair market value of shares based on the Balance sheet as on 31.03.2014, and there was no significant difference noticed by the assessing officer. The Income-tax Officer is not only an adjudicator but also an investigator. As an adjudicator and investigator, the assessing officer conducted further inquiry in assessee`s case and framed the assessment order under section 143(3) of the Act. We note that there is difference between Lack of enquiry and inadequate enquiry . It is for the AO to decide the extent of enquiry to be made as it is his satisfaction as what is required under law. Reliance is placed on the decision of CIT v. Sunbeam Auto Ltd. [(2010) 332 ITR 167], wherein Hon ble Delhi High Court has held that if there was any inquiry, even inadequate, that would not by itself, give occasion to the Commissioner to pass order u/s 263 of the Act, merely because the Commissioner has a different opinion in the matter and that only in cases where there is no enquiry, the power u/s 263 of the Act can be exercised. The ld. PCIT cannot pass the order u/s 263 of the Act on the ground that further/thorough enquiry should have been made by AO. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... expert for State Bank of India(The Lender Bank) , with suitable modification to the projections for the reason of delay and change in the market conditions at that point of time. Hence assessing officer having examined these valuation reports, took a possible view, therefore, we are of the view that such order passed by the assessing officer under section 143(3), dated 06.12.2017, is neither erroneous not prejudicial to the interest of revenue. In the conclusion we are of the view that none of the reasons set out by ld. PCIT for invoking the jurisdiction u/s 263 of the Act are sustainable. The impugned order of ld. PCIT has to be quashed for the reason that order of the assessing officer sought to be revised in the impugned order was neither erroneous nor prejudicial to the interest of the revenue for the reason of any lack of inquiry that the assessing officer ought to have made in the given facts and circumstances of the case. We accordingly quash the order under section 263 of the Act and allow the appeal of the assessee. 26. In the result, appeal filed by the assessee is allowed. Order is pronounced on 24/01/2022 by placing result on notice board. ..... X X X X Extracts X X X X X X X X Extracts X X X X
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